I recently read an interview on Michael Mauboussin conducted by The Motley Fool. Michael Mauboussin is the chief investment strategist at Legg Mason Capital Management.
In the interview, Mauboussin discussed something new that I have never come across before. It is the concept of “pre-mortem”. That particular section of the interview is as below:
Gardner (interviewer): The third one actually, the pre-mortem, I love; we used to, on our NPR radio show, play a game entitled What Went Wrong? And we [unclear] incredibly popular stock in company, and announce to our audience, “This stock falls 50% over the next five years. What went wrong?” So tell us about the pre-mortem.
Mauboussin: Yeah, so most people are familiar with a post-mortem, right?
Which is a play off the same words, and a post-mortem is we bought this stock and it went down, so let’s get around the table, talk about why we made the decision, how we got it wrong, as you pointed out, and see if there’s lessons that we can glean from that. And again, post-mortems are very popular in different disciplines.
A pre-mortem, and this idea, by the way, was developed by a social psychologist named Gary Klein. He has a very different concept. He says before we actually make the decisions, so we’ve not put any money to work yet. Let’s launch ourselves into the future, and let’s just say it’s July 2013, a year from now. Let’s say that we made the investment and it turned out badly. Now each of us independently should write down on a piece of paper, or maybe even write a little article about what went wrong.
And it turns out when people go through that exercise, they are able to identify up to 30% more factors or variables than they would just standing in the present looking to the future. So somehow this idea of extracting yourself, putting yourself into the future looking back to the present, opens up your mind a little bit versus standing in the present and looking into the future. And it’s a funny thing because you can think about all sorts of predictions people have made about the world, about whatever it is, about energy prices, gold prices, economic growth, what have you, and you can see it’s very difficult to anticipate what’s likely to happen, so pre-mortem can help open up your mind and get you to contemplate or evaluate these variables.
I’m now going to incorporate this technique when I analyse businesses. The full interview can be assessed from here.
2 thoughts on “The Concept of Pre-Mortem”
hey, that’s a very interesting idea and I think it’s good to do so for an investor to counter personal bias. Most likely, I will be using it :)
Yes, it helps to get rid of any biasness we might have, like you said.